Comment: BA/ American alliance may create a monster

Click to follow
The Independent Online
Bob Crandall is an entertaining and eloquent advocate for both his company, which happens to be the world's second-biggest airline, and his cause, which simply put is the freedom of any carrier in the world to fly anywhere it wants. But even the persuasive Mr Crandall, chairman of American Airlines, begins to resemble someone wading through treacle when explaining why his alliance with British Airways should be allowed to proceed.

He freely admits that such alliances, built on the concept of code-sharing between two airlines, are a deception on the travelling public which he has never liked and campaigned against relentlessly. But, he says, governments around the world have sanctioned them and in doing so set new rules for the airline industry. Therefore why shouldn't he now play within those rules to the maximum advantage of his airline and its shareholders?

There is something in this. After all, if you are going to ride roughshod over the business principles you hold most dear, why not do it with one of the world's best airlines, BA, at what is indisputably the world's most important airport, Heathrow.

No one should be misled, however, into assuming that alliances of this nature - not just that proposed between BA and American - are pro-competitive. They are not. Airlines, by their very nature, are producer-led businesses. And the bigger they are the more likely they are to be run by executives who may pay lip service to the notion of competition but who are really interested in maximising their monopoly.

BA and American say that the inevitable corollary of the "open skies" agreement across the Atlantic that would accompany approval for their alliance will be greater competition, more choice and lower fares. The evidence from those countries which have sanctioned similar alliances does not bear this out. Lufthansa/ United Airlines and KLM/ North West, the two other big alliances thus far created have, if anything, increased their stranglehold over the transatlantic trunk routes from Frankfurt and Amsterdam respectively. And that, moreover, is from airports which are nowhere near as constrained by a shortage of take-off and landing slots as Heathrow.

Instead of creating such two-headed monsters, the aim of aviation policy should be to nourish those small and innovative carriers without which progress towards cheaper fares and better service would unquestionably have been slower in Britain and the US, the world's two most liberalised air markets.

That said, there is a certain inevitability about the consolidation which the airline industry is now experiencing. BA undoubtedly overplays the threat to Heathrow's status as Europe's number one hub if the alliance is blocked, and American's threat to seek out another partner, perhaps in the shape of Air France, should be regarded at this stage as no more than a negotiating ploy.

All the same, Mr Crandall is depressingly right when he insists that this is now the way of the world and that both AA and BA will one way or another end up in major code-sharing alliances, if not with each other with somebody else. The best the regulators can probably then do is to impose conditions on the BA-American alliance which preserve proper competition and then police their behaviour rigorously. As a minimum the alliance partners should be made to release slots. They should also only be given anti-trust immunity on a limited number of their combined transatlantic trunk routes. BA and American will bellyache but the alternative is a monopolist's charter.

Will Strong be able to hold on much longer?

Liam Strong, chief executive of Sears, has been hanging on by his fingertips for so long now that it is beginning to look as if, against all the odds, he might yet scramble away from the precipice. When he last announced results, the City gave him six months to demonstrate progress or pack his bags and leave. If anything the situation has since deteriorated further, while Mr Strong's unfortunate decision to climb into bed with Stephen Hinchliffe has been cruelly exposed as a bad error of judgement. Mr Strong may be right to insist that the tie-up with Mr Hinchliffe didn't make things any worse, but the episode has scarred him none the less. Despite it all, his chairman, Sir Bob Reid, continues to say that Mr Strong enjoys the full support of the board and that there is no question of him going.

To say that the City is extremely unhappy with what's been happening at Sears is perhaps an understatement, but before delivering the coup de grace, shareholders need to ask themselves some questions. The first is whether anyone else could have done any better. That Mr Strong has failed to deliver is not in doubt; that it was ever possible to deliver in the short three years Mr Strong has had the job perhaps is. The second is whether shareholders are actually going to gain anything by removing Mr Strong.

The answer to the first question is impossible to answer with any certainty, but on balance it is probably yes. Mr Strong's three-year reign seems to have been characterised by indecision and slowness to act. It is only now that the hard choices - not least the mass closure of large chunks of Sears' shoe retailing operation - are beginning to be made. What strategy there was seems to have been largely flawed; for instance, in identifying Selfridges as a possible candidate for disposal. The London department store is now one of the few parts of the group earning a decent return.

The second question is even harder. It may well be that Mr Strong is now over the hump and that better times lie ahead. Sales are picking up and it is possible that the group could yet trade its way out of its difficulties. Whether this is enough to save him depends on the strength of his fingertips. As ever in life, whether something should happen is a rather different question to whether it will.

A good name is the best form of protection

The Consumers' Association served up motherhood and apple pie yesterday. Its new consumer agenda includes the demand for more and better regulation of financial services and clearer information on these services for consumers, so they can compare products more easily.

It is hard to think of a more vacuous set of aims. Nobody is against better regulation, but it is impossible to get away from the dilemma that regulation imposes costs.Caveat emptor will always be the best protection that investors can get. The regulatory structure obviously needs to be adjusted to deal with clear abuses, such as the pensions mis-selling scandal.

In the end reputation is more important than regulation in protecting consumer interests.

The financial services industry's interest in keeping its good name is a far better, and cheaper, form of investor protection than any amount of extra regulation.

Comments